Post on 16-Aug-2015
SETTING A PRICE OBJECTIVE :
A Company first decides where it wants to position its market offering
Five major objectives are:
Survival, Maximum Current Profit,Maximum Market Share, Maximum Market Skimming andProduct quality Leadership
Maximum Market Skimming
can be FATAL
Favorable Conditions:
1. High Current Demand
2. Unit cost of producing in small are high enough
3. High initial price do not attract competition
4. High price communicates IMAGE of a superior product
Other Objectives
Non-Profit and Public organizations
Some Strategies:1. Partial cost recovery2. Full cost recovery3. Price geared to client’s income
Price SensitivitySeller can charge higher price convincing the product offers low Total cost of Ownership(TCO)
Factors for low sensitivity:
Product is more distinctive
Buyers are less aware of substitutes
Buyers cannot easily compare the quality of substitutes
Expenditure is smaller part of buyers income
Expenditure is small compared to total cost of the end product
Part of cost is borne by another party
The product is used in conjunction with assets previously bought
Product is assumed to have more quality, prestige or exclusiveness
Buyers cannot store the product
Companies prefer low sensitive customers
Elastic Demand Inelastic Demand
Higher Elasticity – Greater volume growth
Price Elasticity
Long-run elasticity may not be equal to Short-run elasticity
Price Ineffective band: band within which price change has little or no effect
Fixed Cost
Variable Cost
𝑇𝑜𝑡𝑎𝑙𝐶𝑜𝑠𝑡=𝐹𝑖𝑥𝑒𝑑𝐶𝑜𝑠𝑡+𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝐶𝑜𝑠𝑡
𝐴𝑣𝑒𝑟𝑎𝑔𝑒𝐶𝑜𝑠𝑡=𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡
𝑈𝑛𝑖𝑡𝑠𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑varies with the level of Production
(Overhead)don't vary with production
Experience curve
Experience-curve pricing has risks:
- Aggressive pricing gives cheap image- May stuck with low technology
Average cost decreases with increase in Experience.
Target Costing
Firm should examine each cost element and bring down costs
Target range for cost is assigned to designers, engineers
Analyzing Competitors’ Costs, Prices and Offers
Competitor’s Possible price reactions, Prices and Costs should be taken into account
Selecting a Pricing Method
Markup Pricing,
Target-return Pricing
Perceived-value pricing
Value pricing
Going-rate Pricing
Auction-type pricing
Target-return Pricing:
Price that yields Target RATE OF RETURN
𝑇𝑎𝑟𝑔𝑒𝑡 𝑟𝑒𝑡𝑢𝑟𝑛𝑝𝑟𝑖𝑐𝑒=𝑑𝑒𝑠𝑖𝑟𝑒𝑑𝑟𝑒𝑡𝑢𝑟𝑛∗𝑖𝑛𝑣𝑒𝑠𝑡𝑒𝑑𝑐𝑎𝑝𝑖𝑡𝑎𝑙
𝑢𝑛𝑖𝑡 𝑠𝑎𝑙𝑒𝑠+𝑢𝑛𝑖𝑡𝑐𝑜𝑠𝑡
Perceived-value Pricing:Depends on :
Buyer’s image of product performance,Channel deliverables,Supplier’s reputation,Customer support,Trustworthiness etc.,
Deliver more unique value than the competitor.
Advertisements, Internet can enhance perceived value
Value Pricing:Win loyal customers by charging fairly low price
for a HIGH-Quality offering.
Everyday low pricing (EDLP): charge constant low price with little promotion
High-low pricing: charge higher price on daily basis & temporarily lower than EDLP level
Auction-type Pricing:
• English Auctions (ascending bids)• Dutch Auctions (descending bids)• Sealed-bid auctions
Selecting the……Final Price
Impact of Other Marketing Activities:• Brands with Avg. relative quality and high
advertisement budgets can charge premium prices.
• High relative quality and high relative advertisements obtain HIGHER prices.
• +ve relationship between high prices and high advertisements
Company pricing policies:Price must be consistent with company pricing policies
Selecting the……Final Price
Gain and risk sharing Pricing:• Buyers may resist because of high perceived
level of risk.• Seller can offer to absorb all or part of risk if
promised value isn’t delivered
Impact of Price on other Parties:Price must be consistent with company pricing policies
DISCLAIMER
Created by Srujan Dasari, IIT Kharagpur,
during an internship by
Prof. Sameer Mathur, IIM Lucknow.
www.IIMInternship.com